The Issue of Disclosing the Information to Investors - Dynomine Company - Essay Example

Introduction Dynomine Company has currently 20 shareholders. Each shareholder originally contributed $250,000 to the company in exchange for the issue of 250,000 $1 shares. At the time of issuing the shares, Dynomine had no need to, and did not, use a Product Disclosure statement. At present Dynomine only has $1M left in the bank as the other $4M has been spent on administrative expenses and the costs associated with the mining leases. The issue of disclosing the information to investors The policy that underlies the corporate and securities legislation in Australia is that corporations will be required to disclose information about the business and financial structure to the public1. Investors will have to deal with those corporations in such a way that the interest is protected. The fundamental aim of the fundraising will be to give clear and correct information by publication of prospectus. If prospectus is not published, then any other disclosure document should be there and this is being done to ensure that investors can make informed and rational decision about the initial investments in a corporation. The mandatory disclosure provision in Australia has been taken from the United Kingdom. There are arguments for and against disclosure .The arguments that has been said in support for disclosure requirement is that investor protection argument should be done to protect investors from making investment on the basis of fraudulent corporate praticse.The other argument that has been done in support of investor market is that the investors will not be feeling threat about securities and security market. Mandatory disclosure will be good for the company in as it can act as disinfectant in the sense that getting the information to be published will be helping the Dynomine Company. That will give the impression that Dynomine Company will not be doing anything to mislead investors. The investment decisions are efficient in such a sense that investors are more likely to use their resources to productive use. The investors will be given level playing field in such a way that all investors will be starting from the same base. The disclosure should be done in such a way that the consumer legislation is protected. The argument that can be said against this disclosure method is that there is no empirical rejoinder that has proved that not disclosing information has led to greater incidence of fraud from the side of corporation to investors. The main aim of the disclosure rule is to ensure that every investor will be having the same level of playing field. The corporation should think of disclosure as public good and that has not to be forgotten. The investors will be given access to information and can use it any way they want and that is called the free rider problem. The opposite argument for this company is that there is no need to disclose information can benefit the rivals in the market and the investors who are not interested in investing .The company can take the risk of having investor disaffection than giving more information to the investors. That does not mean keeping back the information will not be benefitting the long term advantage of the company and that has to be negated .The best advantage of this company will be to make opening of information. The background to the fundraising issue The board of Dynomine has obtained a report from a consultant who provided an estimate concerning the costs to set up the mine and operate it until it starts to earn revenue. This consultant’s estimate is that these costs would be $14M. The consultant has forecast that the mine could be operational within 3 years. The consultant estimates that profits would be $1M in the first year after it becomes operational, rising to $3M in the second year after it becomes operational, and $4M in the third year after it becomes operational. Boom Limited is willing to invest $6 Million in exchange for the issue of 6 million shares at $1 per share. The remaining $8 Million will have to be raised by a public float. The board also intends to have Dynomine’s shares listed on the Australian Securities Exchange. How does one become member of a company? Any human person or corporation can become member of the company and the membership can be obtained in number of different ways like by agreement in the application for registration of the company, by transferring of shares from an existing member and by transmission of shares and by conversion of debentures. Shares are deemed to be the personal property of member. The provisions will not be applying to Australian Stock Exchange Companies like ASX listed companies. There will be like ASX listing rules and it will be difficult for an individual company to maintain the register as the shares are being transferred very fast. The company could attract the investors by getting the merchant banks and share brokers to accept the risk by underwriting the issue. This can be achieved by promoting the information that Boom limited is willing to invest $ 6 million. The company can disclose this information as it can attract funds when it goes for public float. The overview of the fundraising provisions in the Chapter 6 D of the corporation law states that the offer must not breach the 20 investors ceiling and the securities or shares are sold for more than 20 persons in a year. The Dynomine NL Company has got 20 share holders and the next share will be issued only after one year .The offer must not be breaching the $ 2 million mark and this is the stipulation that has been said in the rule section 708 (3) b.There will be large scale investor exclusion in the form that fundraising has been raised from private placement of securities and a large institute has got the share. In reality this argument will not hold true for this company as $ 8 million will be raised by public floating and a private company will be having share for $ 6 million. The Australian stock exchange has operated at a market price and there is huge difference from the quotation system that exists in the American Exchange. 99 per cent of the registered companies have been having a share capital and there should be understanding of equity capital. Equity capital is the term given to companies having different mode of shares and the company having one share means that it is called the equities and there are specific rules that has been there for the maintenance of share capital. Before the year 1998, there was lot of restriction to the number of shares that can be issued and abolition par value has meant that companies can issue shares or have an issue price for share. The proprietary companies has a right that will give the existing shareholders aright of new share and that has to be thought for as the company has already 20 shareholders and that need not be ignored. The issuing of share has to be in the primary purpose of raising capital and in this case, the company will be raising money for the purpose of mining and there is shortage of $ 8 million. The company will be issuing share in return for consideration and in this case it need not be ignored. There are different types of shares that are available that provide different membership rights. The companies that have been listed in the Australian Stock exchange will be having different type of shares and there will be different type of classes. That can be said as the class A ordinary type voting shares and class B ordinary share. The three main types of shares that are being described are the ordinary shares, preference shares and the deferred shares. Ordinary shares has been said to have only one share at a time. The ordinary share has been found to be not having a voting pattern at all. The ordinary share holder will entitled to receive dividend once the profit has been shared. The ordinary share holder will be getting dividend only when the dividend of preference shares has been paid. There is no guaranty that the dividend will be paid at all .The ordinary share holder will be entitled to participatory right and the profits in the preference share are usually cumulative when considering with ordinary shares. Deferred shares are the founders ordinary share in which people who form the company will be buying the share. There will be greater voting rights and that can mea hundred voting per share. The corporate constitution2 will have to be followed in the company as the company that has been under discussion will be the no liability companies and that means there will be requirement of constitution and that should have an object clause that will be specifying the mining of the sole purpose. There has to be clear approval from the part of share holders when going for funding that has to be raised from public funding and that means internal process of the company has to be called for. This should be in tune with the corporate constitution. Generally the corporate Australia will be prohibiting the control of shares by a company and that means the exception will be allowed when there is valid financial assistance. The case is that Boom Limited has been there for valid financial assistance as $ 6 million of the $ 14 million project has been given. The senior management can decide on how the fundraising has to be done to develop Profitability.The Corporation will be trying to increase the share capital of the company and that means there are different methods of raising share. The most common method will be to go for rights issues, options, share purchase plans and dividend reinvestment schemes. The amount of capital that has to be raised if it goes over $ 5 million means that there should be a prospectus3. The question is that in this case whether the amount that has to be raised is $ 8 million and that has not been the capital amount. Then the question is whether this is the capital? The answer can be said as yes and that means there should be prospectus and the reason for saying that the proposed amount is capital is because of the fact that the amount needed for mining has to be raised from share market. That means the amount will be used for the gold mining and that means the amount can be classified under capital. The company will be put to liability if the information that has been said in the prospectus turns out to be false. There is specific fund raising schemes penalty and that means offering securities without disclosure document and section 727 states more about it. There will be a lot of civil and criminal liability available for the investors and that is the main point when making a prospectus for the share market. Conclusion The company will have to look at various issues when going for fund raising and that means there has to be issuing of information or disclosing of information. That means prospectus has to be issued and there should be clear statement about the reasons for issuing of the prospectus. In this case, the issuing of prospectus should contain the details of gold mining and that mean there is shortage of fund that is necessary for the project to take off. The disclosing of information should contain the main statement that the company has been taking $ 6 million from the Boom Limited company. There has to be also disclosing of information that the project needs $ 14 million and there will be need of extra $ 10 million if the mine develops problems and there is every chance that the mine proposed can develop that problem as the gold mine company that has been operating nearby has difficulties with water flooding at their mine .This is a very important information as chances are very high that this problem can develop in the Dynomine NL company. Read More